Kroszner: “Austerity versus stimulus is a false debate”

November 15, 2012 06:00AM

Randall Kroszner’s outlook for next year may be bleak, but it’s not as bleak as the Mayans’ prediction that the world will end on December 21, 2012, he said, opening Chicago Booth’s Economic Outlook 2013 in Chicago.

Kroszner, Norman R. Bobins Professor of Economics at Chicago Booth and a former governor of the US Federal Reserve, said that the ongoing debate in the US over austerity versus stimulus has been unproductive. “We need to think about where we’re going to get the most bang for our buck,” he said. “Considering the social value of a proposed expenditure relative to its cost is a sensible way to go.”

Kroszner expects the US economy to grow, but not rapidly. The “sideways slide” of the past year “is likely to continue, with only modest growth of between 2 and 2.5 percent during 2013.”

“We will continue to have private sector job growth, but this modest growth will not be sufficient to bring down the unemployment rate rapidly from around 8 percent,” Kroszner said.

While he expects the Federal Reserve to buy new securities and expand its balance sheet when the Federal Open Market Committee meets next week, Kroszner cautioned that “new rounds of quantitative easing are likely to be less effective going forward.”

“The Fed is going to do ‘open mouth’ operations as a complement to their open market operations to try to make them more effective. They’re focusing a lot on the clarity of their communications to give greater certainty to markets, firms, and individuals,” he said.

Turning to China, Kroszner expressed concern the increasing use of off-balance-sheet financing by banks and compared it to the US before the financial crisis. “There’s a very rapid growth in the shadow banking sector… with frightening parallels to what happened in the US,” he said.

Kroszner, recently back from a trip to China, where he met the incoming premier and top securities regulators, said China’s biggest challenge was rebalancing its economy towards more domestic demand by developing a large middle class.

“We want a robust, diverse and vibrant entrepreneurial and consumer credit sector, but one that is sustainable,” Kroszner said. “The shadow banking sector tries to get around regulation and offers high rates of return, but could come back on to banks’ balance sheets to bite them.”